Is NewAge (NASDAQ:NBEV) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that NewAge, Inc. (NASDAQ:NBEV) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for NewAge

What Is NewAge's Net Debt?

As you can see below, NewAge had US$17.6m of debt at September 2021, down from US$20.0m a year prior. But it also has US$46.8m in cash to offset that, meaning it has US$29.2m net cash.

How Strong Is NewAge's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NewAge had liabilities of US$97.8m due within 12 months and liabilities of US$85.7m due beyond that. Offsetting these obligations, it had cash of US$46.8m as well as receivables valued at US$8.87m due within 12 months. So it has liabilities totalling US$127.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$151.2m, so it does suggest shareholders should keep an eye on NewAge's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, NewAge also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NewAge's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, NewAge reported revenue of US$440m, which is a gain of 77%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is NewAge?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months NewAge lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$32m of cash and made a loss of US$7.1m. Given it only has net cash of US$29.2m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, NewAge may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that NewAge is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.